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Question 1

Brooklyn plc manufactures and sells only one product and the accountant has been asked to prepare a report that will highlight the areas that should be focussed on at the next meeting of the Directors of the company.

Details of the results and ratios have been calculated from the financial statements, using the attached formulae.

2016 2017 2018

Sales units 160 000 200 000 220 000

000 000 000

Sales 16 000 17 000 18 700

Profit before interest and tax 800 980 1 053

Profit after tax 490 595 588

Non-current Assets 5 000 5 400 7 500

Cash --- 600 200

Profitability ratios

Gross Profit margin 30.0% 39.7% 45.0%

Net Profit margin 5.0% 5.8% 5.6%

Return on Capital Employed 10.0% 9.1% 8.1%

Return on Shareholders Funds 8.2% 9.7% 9.3%

Liquidity and management of working capital ratios

Current ratio 3.0 4.4 3.75

Acid Test / Quick ratio 1.3 1.9 1.50

Inventory days 95 142 160

Receivables days 46 51.5 54.6

Payables days 57 57 71

Gearing ratio 25% 43% 51.5%

Required

1. Prepare a report that will assist the Board members to focus on the issues that should be addressed in the period from 2016 to 2018. The possible causes of any changes in the ratios that have occurred over the period should be highlighted in the report.

2. Suggest ways by which the Return on Capital Employed could be improved during the next year.

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